Owning GameStop‘s (NYSE: GME) stock last year was like taking a ride on one of the wildest roller coasters. Starting 2021 at around $19 per share, the price zoomed to over $300 by the end of January. After experiencing lots of ups and downs, the price was over $148 per share at the end of last year.
Owning a meme stock can give you a sense of excitement. After all, the share price can increase quite a bit over a short period, as seen with GameStop. But long-term investors aren’t pursuing stocks for the thrill, or even talking about their stocks at parties. They’re interested in owning shares in companies that can grow revenue and earnings over time, and having the stock prices follow suit. If you examine it closely, you’ll see that GameStop faces continuing challenges that put these goals in question.
Image source: Getty Images.
Losing to digital
The competition from digital games has been heating up over the last several years. Major offerings from Epic Games, Steam, Microsoft, and Sony provide customers the opportunity to download games directly. This is to the detriment of GameStop, which primarily relies on its retail stores to sell consoles and video games.
In the company’s fiscal third quarter, which ended on Oct. 30, sales increased by over 29% to $1.3 billion. But this seemingly good news isn’t quite as positive as it seems. Hardware sales, which rose by 62% to $669.9 million, drove much of the increase, thanks to new game consoles released in late 2020 by Sony and Microsoft. However, these companies typically only release new hardware every few years. This means GameStop may face challenges to keep sales growth going as fewer people purchase systems.
Meanwhile, software sales fell by more than 2% to $434.5 million. Hence, it doesn’t look like game sales got a boost due to the new consoles, as consumers turned to alternative sources.
Investors were naturally excited when Ryan Cohen, founder of successful online company Chewy, built a significant ownership stake in GameStop. He also became chairman.
However, since the company hired a new CEO and CFO who had experience with online giant Amazon, details about GameStop’s digital strategy have been lacking. Perhaps management has a strategy for propelling the company forward, but investors need to know more before considering the stock.
Unfortunately, GameStop continues to lose money despite the top-line increases. In the latest quarter, its operating loss widened to $102.9 million from $63 million in the year-ago period.
Part of that stems from selling more game consoles and less software. That’s because hardware has a lower margin. With intense competition from digital games and the prospect of selling fewer game consoles, achieving future profitability looks difficult.
Certainly, GameStop faces challenges, notably a competitive landscape as digital games encroach on its territory. That makes the prospect of turning a profit uncertain. When a money-losing company faces stiff competition, there are better companies to invest in. I think this is a good opportunity for current GameStop investors to sell their shares.
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